How to make money by holding Cardano

Updated: Oct 25, 2021



Making money off cryptocurrencies can be frustrating due to high volatility and often a lack of background informatiion. However there is an alternative way to get safe returns on your ADA holdings - completly passive.


By staking your ADA in a pool you can get an average annual return of 4.60%, all while your money is safely stored in your wallet. To stake your money there are two approaches. Either you run a node in the cardano network yourself, or you delegate your ADA into an existing pool.


To understand how staking actually works and how you can become a validator in the cardano network we have to start at the beginning and understand why a node even makes money.



What is a Cardano node?

Cardano is the biggest blockchain using the proof of stake mechanism. Proof of stake means that new blocks are created through the proof of stake, rather than raw computing power (like bitcoin, ethereum, …)


A node is a single point in the blockchain network that works interconnected with other nodes to validate transactions and blocks. For Cardano two types of nodes exist:

  1. The block-producing nodes are the core component of the network. These nodes are responsible for producing new blocks.

  2. relay nodes act as proxy to increase the security of the network. External nodes can not directly communicate with block-producing nodes but have to go over a relay node first. If a relay node gets compromised the network can just switch to a different one.

Block-producing and relay nodes in part of the network

As you can see, the two nodes are interconnected and only work together. In order to operate a stake pool you need a block-producing node and at least one relay node.



What is a stake pool?

A stake pool is a reliable server node that holds and maintains the combined stake of one or more stakeholders in a single entity. Running a stake pool requires two roles to be present:

  • The stake pool operator is the person responsible for setting up and keeping the node running. They can sign blocks and register or retire a stake pool. The stake pool operator can also, but doesn’t necessarily have to

  • The stake pool owner is a persons pledging their stake to the pool in order to increase the overall stake and thus the rewards


A stake pool always has to have one operator and at least one or more owners. Operator and owner can also be the same person, however to stay competitive with other nodes, many stake pools have multiple owners to form one larger stake.



How to earn rewards?

To earn rewards by staking your Cardano you first need to decide if you want to be a stake pool operator or a stake pool owner.


Stake pool operator

Pros:

+ chance to receive higher rewards (declared costs and declared margin)

Cons:

- High operational skills required (system, server administration, DevOps)

- High effort in operating and maintaining the node

- Responsibility to operator node 24/7/365


Stake pool owner

Pros:

+ No operational work for the node

+ easy access

Cons:

- Lower rewards


As you can see, the operator has a high responsibility and needs prior knowledge to set up and run the node, but gets higher rewards in return. For the average user pledging to an existing pool is easier while still getting decent returns.


Before we look at how to become a pool operator or a pool owner let's look at how much each role actually pays out:



Rewards

Stake pool operators receive direct stake pool rewards. Operators can decide on their own profits by setting two parameters when the pool is configured. Tax-fixed is a fixed amount the operator earns (as long as the total reward is equal or higher in that epoch). Defining a Tax-ratio the operator earns a percentage of the rewards.


This makes it hard to calculate an average return for a stake pool operator. The earnings depend on the configured fixed and ratio taxes and the total amount of ADA in his stake.


Stake pool owners receive delegated staking rewards for Cardano with an estimated annual return of 4.60%. So for example a stake of ₳350 ($1000) the return would be around ₳16 ($50) per year. Rewards are paid out every epoch, which is 5 days.


For a more accurate estimation use Cardano's staking calculator.


Keep in mind that the actual amount of ADA you earn through staking depends on the stake pool performance (how many blocks have been produced vs. how many were expected) and changes in the network parameters.

Also note that Cardano's market price can still fluctuate, potentially earning you higher rewards - or lowering the value of your stake.



Becoming a stake pool owner

The easiest way to stake your ADA is using the Daedalus Wallet:


1. Download the Daedalus Wallet and follow the instructions to set up a wallet.

Create a wallet in Daedalus
Create a wallet in Daedalus

2. Transfer ADA to the wallet. The minimum amount required by Daedalus is 5 ADA + transaction fees.


3. Point your stake to a stake pool using the delegation function of your wallet. Make sure to select a stake pool with a high saturation to get consistent rewards. If you want to delegate at least 1.5M - 2M ADA you should choose a pool with low saturation. Smaller pools can pay out more and your own stake is enough to consistently earn rewards. To find good pools you can visit ADApools.

Choosing your staking pool in Daeldalus
Choosing your staking pool in Daeldalus

4. Wait for rewards (around 20-25 days)


NEVER send your ADA to a different wallet! For staking your ADA it doesn’t have to leave your wallet at any time. Cardano also does not require you to keep your ADA locked up in the staking pool. Rather at the beginning of each epoch (5 days) the network tracks where your ADA is staked for the next 5 days. In between epochs you can move your ADA around freely and still get the rewards from the pool!



Becoming a stake pool operator

If you want to start your own node there are four different approaches you can take:

  • Nix

  • directly from source code

  • Docker

  • on an AWS instance

Cardano itself recommends using NIX, you can see their documentation here.

Nix requires you to have Linux or Unix, at least until the second phase of cardano testnet will introduce support for Windows and Mac.

If you don’t have Linux or Unix you can still run the node on an Amazon Web Service instance.


Keep in mind that in order to run your own node you need to have at least the following skills and hardware requirements for the server:


Prerequisites for stake pool operators

  • system operation skills

  • server administration skills

  • development skills are useful


Hardware requirements for the server

  • 4 GB of RAM

  • 24 GB of hard disk space

  • a good network connection and about 1 GB of bandwidth per hour

  • a public IP4 address


Conclusion

Staking your money to earn rewards from the cardano network can be easy or hard, depending on what role you want to play. If you don’t have a lot of ADA to invest and want to get steady rewards, I recommend staking in an existing pool. If you have some technical knowledge and want to go for the higher earnings, then you should look into operating a Cardano node yourself.

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